Understanding your options in a volatile water market

Understanding your options in a volatile water market

4 August 2021

By Heather Henderson, Client Specialist, Waterpool Trading

As you are all aware it is very hard to predict one year to the next and the financial impact of water costs on a cashflow can be detrimental. With the water market being so volatile, water security is very important and there are various options available.

We find not all irrigators own enough entitlement to cover their requirements. Many farmers rely on the allocation market as a short term option to make up any shortfall in requirements but are at the mercy of the market and seasonal conditions. That’s where security products are a good option to spread your risk.

Security of water supply is crucial  for survival and there are a number of options available that need to be considered.

Some security options include forward allocation and lease agreements and a common question around these products is “what’s the difference?”

Lease

Lease is a good product for a more longer-term security. Unlike Forward Allocation and the Temporary market, lease is against entitlement and subject to allocation. It’s similar to owning the water entitlement for the period of the lease.

Having a lease agreement allows you to budget on an agreed price for a 3-5 year period, allowing to spread your risk over various other products. With terms available, this also assists with cashflow through the season, rather than an upfront outlay of funds.

Irrigators are also choosing to sell their own permanent entitlement and lease it back, which enables them to inject capital back into their business.

Key points

Leasing has the same characteristics as owning water and is therefore subject to seasonal allocations. For example, leasor pays the agreed price per ML for the entire lease amount, however only allocated water for each season is usable.

A typical lease term is 3 to 5 years with payment on terms generally available.

Leasing Entitlement is becoming a product of choice as irrigators look to secure water and still retain working capital within their business.

Waterpool provides a ‘start to finish’ service on all Lease of Entitlement and our fees are very competitive.

Forward Allocation

Forward water is the purchasing and securing of allocation at a future date(s).

As this is “Allocation” water, the buyer is entitled to 100% of the megalitres purchased at the price agreed.

Irrigators commit to a price of allocation and can choose delivery of this allocation in 1 to 5 parcels over the irrigation season.

Just like lease, with terms available, Forward Allocation enables the irrigator to spread their cashflow over the irrigation season.

A feature of Forward Allocation is that it gives the irrigator the security of receiving ‘actual water’ at their chosen delivery dates throughout the season.

Currently Waterpool Trading has various options available in both of these products:

• Forward in zones 7 & 11
• Lease in zones 6, 1A, 7 & 13

Other options which may  be considered

Water Share 

You may look at a strategy to gradually increase your entitlements of HRWS, LRWS or High or General Security. Purchasing permanent entitlement is a long term investment however requires a large initial outlay. While it is a great asset to have it is important to note that after the purchase there will be the ongoing annual fees attached to the new entitlement.

Diversifying

Some users may look at trading out of one zone into another to better align their production and usage needs.

Carryover

Each trading zones have different rules regarding Carryover however, if applicable, Carryover can be a way of securing water for the following season. Traders with capacity can use their own space or can rent space off another trader to park the water into the new season.

Waterpool do offer personalized service, where we can walk through your individual requirements, explain all products and give options that may suit your business. This is a free service and available on your farm.
If you would like to discuss any of the above options, or even a general discussion about what Waterpool can offer, contact Heather on 0439 009 042 or Rob on 0499 334 475.

www.waterpool.org.au

Waterpool is a Corporate Partner of Citrus Australia.